What sets the price for Dynamic Containment in a saturated market?
Since December 2022, there have been no unsaturated auctions in Dynamic Containment Low - we have reached full market saturation. In a saturated market, prices are set based on market competition. This means that the amount a battery could earn in other markets (if it didn’t participate in Dynamic Containment Low) is now most important in setting the price for the service. This is known as the ‘opportunity cost.’
The wholesale market is the biggest ‘other’ market for setting the Dynamic Containment Low price. There are two reasons for this:
Bidding can be done a day ahead, in line with the timings of frequency response bidding. A battery operator can re-trade the wholesale position if the asset wins a frequency response contract.
Wholesale is a big market and the most forecastable of all revenue streams. So it gives battery operators something predictable to price the Dynamic Containment Low service against.
Dynamic Containment saturation will continue, especially with expectations for battery buildout and National Grid ESO reducing the volume requirements over the summer months in 2023. Therefore, we have chosen the wholesale opportunity cost (using our hourly forward power curve) as the basis of our Dynamic Containment price model.
The steps we used to model Dynamic Containment prices on an EFA block granularity are outlined below.
1. Wholesale opportunity value of each EFA
Firstly, we identify the maximum potential wholesale revenue for each EFA block. We do this by finding the best wholesale spread (maximum - minimum price) for each pair of EFA blocks daily. We attribute half of the spread for each EFA block in a pair. An example is shown below using N2EX price data for 1st November 2022.
On this day, the greatest wholesale spread (£74/MWh) is achieved by charging in EFA block 2 and discharging in EFA block 5.
We then find the average potential wholesale revenue in each EFA block. We refer to this as the wholesale opportunity value. It quantifies the average net revenue achievable by trading in this block and another EFA block (including itself).
Dynamic Containment Low prices in EFA block 5 are usually much higher than the rest of the day, and the wholesale opportunity value consistently underestimates this.
We apply the observed trends in the Dynamic Containment pricing per EFA block to this wholesale opportunity value to better predict EFA block clearing prices.
2. Adjust wholesale opportunity values
We adjust the wholesale opportunity values in line with two historical factors:
Clearing prices in the Low and High services: The sum of Dynamic Containment Low and High clearing prices should equal the wholesale opportunity value. Therefore, we must divide the wholesale opportunity value between the Low and High services, historically representing 70% and 30% of the total (Low + High) clearing price.
EFA block clearing price ratios: This adjustment increases prices in EFA blocks that have historically had higher prices (e.g. EFA 5) and decreases prices in EFA blocks that have historically had lower prices (e.g. EFA 3 and 4), while keeping the sum of prices constant. We do this separately for the High and Low Dynamic Containment services because they typically have different profiles. The High service has higher prices in EFA 2, and the Low service in EFA 5.
Finally, we divide the adjusted wholesale opportunity value by 4 to convert to an hourly clearing price - since each EFA block lasts 4 hours.
Dynamic Containment revenues
We calculate asset-specific Dynamic Containment revenues using our forward prices and the EFA blocks when our asset provides this service. We assume symmetrical delivery of Dynamic Containment (e.g., the battery provides both Low and High services) and a de-rating factor of 0.9. The revenue is therefore equal to:
Revenue = (DCL price + DCH price) x battery-rated power x 0.9 de-rating factor
This is calculated for each hour of Dynamic Containment delivery. Outside of these hours, we optimize the asset’s wholesale revenues while ensuring Dynamic Containment delivery requirements are met. For more detail on our dispatch model and assumptions, look at our help center article.